[Anonymous]

In preparing its cash budget for July 2012, Reed Company made the following projections:

Sales $1,500,000

Gross profit (based on sales) 24%

Decrease in Inventories $70,000

Decrease in A/P for inventories $120,000

For July 2012 what were the estimated cash disbursements for inventories?

A: 1,055,000

B: 1,175,000

C: 1,050,000

D: 935,000

Answer: B, 1,175,000. Since gross profit margin is 25%, COGS must (1) be $1,125,000 (75% x $1,500,000). Therefore, purcahses of inventory on account (3) must have been $1,055,000 ($1,125,000 – $70,000). If AP was decreased by $120,000, (4), cash disbursements must be (5) $1,175,000 *$1,055,000 + $120,000).

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Why does a decrease in inventories of $70,000 mean that purchases of inventory on account is less than $70,000?

[M.O.D.]

The only way to reduce inventory is to use it up/sell it.

So assume beginning balance is 70,000, ending balance 0.

Then make a T-account for inventory.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

The only way to reduce inventory is to use it up/sell it.

So assume beginning balance is 70,000, ending balance 0.

Then make a T-account for inventory.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[mla1169]

It's all of the factors together not just the $70k decrease in inventory that determine the decrease in AP. If you didn't pay any bills during the month, ap would have been the same or even greater.

The $120k decrease in AP was simply an estimate for the budget. It could have been anything including an increase. But given the sales, margin, and changes in both inventory and ap you can calculate the projected cash disbursements.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

It's all of the factors together not just the $70k decrease in inventory that determine the decrease in AP. If you didn't pay any bills during the month, ap would have been the same or even greater.

The $120k decrease in AP was simply an estimate for the budget. It could have been anything including an increase. But given the sales, margin, and changes in both inventory and ap you can calculate the projected cash disbursements.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Author]

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